DeFi players: You think you are managing money but you are being arbitraged
Text | Edited by Xiao Nezha | Produced by Bi Tongtong | PANews
"Life is ignorance. If you don't realize it, you won't become a Buddha. If you don't go crazy, you won't become a demon." When watching "Farewell My Concubine", I have a deep memory of the phrase "If you are not crazy, you will not survive", and the image of Chen Dieyi played by Leslie Cheung is vivid in my heart.
The first half of this sentence can be given to Compound, and Compound is still on the road to madness. As for the second half of the sentence, I hope it can do the same.
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The locked position has increased by 6 times in a week, and the token has increased by 14 times
June 16, 2020, is the beginning of Compound’s madness. To put it bluntly, it is to distribute the governance token COMP to users, and to put it simply, it is to borrow money to mine.
Let me talk about two crazy things: the lock-up volume has increased by 6 times, and the governance token COMP has increased by 14 times, becoming the No. 1 market value of DeFi.
According to DeFi Pulse data, the total value of USD tokens locked on the Compound platform on the evening of June 22 has risen to 557 million USD, while the total USD value of tokens locked on the platform before June 16 was only USD 90 million. It rose more than 6 times in just a few days.
Maker, the former leader of DeFi, is now being rubbed on the ground, and the amount of locked positions has been surpassed.
The amount of locked positions that Compound can skyrocket in just a few days is all for mining COMP, and to put it more directly, it is for high interest.
On June 9th, everyone was cheering for the DeFi market value to return to 2 billion U.S. dollars. Now, with the help of Compound, the DeFi market value has passed 6 billion U.S. dollars.
On the evening of June 22, the price of COMP was $256, and its total market value has surpassed that of MKR, becoming the number one in the DeFi field.
So what is the income of this COMP? Since Compound does not have a pre-sale, its equity investors can obtain tokens, which can be regarded as the initial price of COMP tokens.
Compound raised $8.2 million in seed round financing and $25 million in Series A financing, for a total of $33.2 million raised and 2,396,000 COMP tokens distributed. Then COMP price = $33.2 million / 2396000 = $13.856.
On the first day of COMP excavation, Compound Team placed 2000ETH / 25000 COMP trading pair on Uniswap, that is, the price on COMP is: 1 COMP = 0.08 ETH, or $18.4.
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Besides Compound, who else can fight
Compound is so popular, will other DeFi products follow suit?
In the DeFi ecosystem, according to dapp.review data, there are a total of 8 mortgage lending products distributed on 3 platforms, namely ETH, EOS, TRX, mainly on the ETH chain.
From the perspective of whether to issue coins, it can be divided into:
Projects that issue coins: Maker(MKR), Compound(COMP), Aave(Lend)
Coinless projects: Nuo network, Dharma, lendf.me
The mortgage lending models of these projects can be divided into four models:
1. Maker DAO, a stable currency model, is analogous to a pawn shop, only lending but not borrowing;
2. Compound, a liquidity pool transaction model, analogous to a bank, deposits and withdraws at any time;
3. Dharma, P2P matching model, similar to P2P loans, cannot be borrowed and repaid at any time;
4. Aave, flash loan, unsecured loan, prepared for arbitrage.
Maker, the former boss, has been suppressed. The Dharma model is generally not good due to lack of liquidity. Although Aave has a flash loan arbitrage function, it is only suitable for a small number of institutional users. Who else can fight?
From the perspective of the mortgage lending model, Maker, Compound, and Aave have their own characteristics and can compete with each other, and all three have their own tokens. Why is COMP alone so powerful?
Looking at a set of data, according to the statistics of compound.finance, the interest paid by the platform on June 22 was: 211,861 US dollars; while the mined out COMP tokens were 2,880, if calculated at a price of 250 US dollars, it would be 720,000 US dollars.
$720,000 > $211,861
What does this mean? Is the blockchain world entering the era of negative interest rates ahead of schedule? Have you borrowed money and paid back the money? of course not. Because the profitability of Compound and the price of COMP have been decoupled.
Super Jun expressed emotion about the popularity of COMP: Defi has more energy than Dapp.
The comment section of this Weibo revealed the true meaning. DeFi is to remove the useless foreplay of Dapp and get straight to the point, which is to make money, of course it is hearty!
Seeing this, do you think of the madness of ICO, how do various ICO projects make money? Is the project profitable? No, it depends on the story and pull ability.
For the hot scene of DeFi, V God also came out to cool down.
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Under the huge profits, institutions enter the market for arbitrage
Just how profitable Compound is, see a statistics made by Bai Temi, as shown in the figure below.
Whether it is saving money or borrowing money to make more profits, the interest rate is still very high. And what's more interesting is that according to the current statistics, people who borrow money earn more money than people who save money. So where does the money come from? Secondary market transactions from COMP.
Such a high interest rate naturally requires arbitrageurs, such as repeated mortgages and loans to mine.
1. If the personal operation is too aggressive, the mortgage loan will also explode
Some people think that mortgage loans will not blow up their positions, so they use the maximum amount of mortgage loans to mine COMP. The fact is too cruel, and the stablecoin fluctuates a little bit, which leads to the liquidation of mortgage loans.
This kind of liquidation can only be said to be too greedy. If you don't understand the rules, you can only bear the consequences. However, there are centralized platforms that understand the rules to borrow money, and start to use other people's money to "risk-free" mining arbitrage.
2. Institutions enter the market for arbitrage, and middlemen earn the difference
According to DeBank data, on June 18, the centralized lending platform NEXO deposited 20 million USDT into Compound; on June 19, NEXO deposited 28 million USDT into Compound again; A total of about 60 million USDT has been deposited successively. Perhaps due to the influence of public opinion doubts, NEXO has now liquidated the 60 million USDT deposited in Compound.
However, based on the rate of return at the time of deposit, the annualized rate of return can reach 55.36%, while the interest rate of users depositing USDT on NEXO is 10%. Genesis, a centralized cryptocurrency lending service provider, also stated that due to user borrowing and mortgage arbitrage on Compound, the lending rate of stablecoins is now rising.
That is to say, users go to the centralized platform to borrow money, and then go to the decentralized lending platform to mortgage to earn the spread, or even a centralized platform like NEXO goes to the decentralized platform to borrow money in person. Under the arbitrage operation, several parties can eat To the meat, but the risk, who bears does not know yet.
From the user's point of view, you think that you are lending money to the lending platform to make a steady investment and make a profit, but you don't know that it is being used by others for arbitrage.
The deposit rate on NEXO is 10%, which is quite high. The interest of many centralized platforms does not include the rewards of COMP, and the deposit interest is not as high as that of Compound. For example, the interest of Matcha’s USDT current deposit is 3.88%. Compound’s deposit interest was originally 11%, but now it has been reduced to 4.66%.
For lending projects whose user deposit interest is lower than Compound’s deposit interest, if you directly use the user’s assets to Compound arbitrage, you will become a middleman and earn the difference, which is really sweet.
In the past few days, Compound’s lock-up volume has increased from US$90 million to US$540 million. How many lending platforms like NEXO will operate in it?
Compound is a decentralized lending platform. Although there is no risk of running away, it does not mean it is safe. The risk comes from code risk. After all, the decentralized mortgage lending platform lendf.me was stolen in March this year.
3. A new way of arbitrage, big BAT players enter the market
With the continuous popularity of COMP, COMP mining arbitrage has also updated its gameplay. An account mortgaged 130 million BAT to Compound. On the Compound platform, the BAT deposit rate is 26%, and the lending rate reaches 33%.
BAT dug out 914 COMPs, accounting for 1/3 of COMP's daily mining volume.
Therefore, COMP mining arbitrage has also updated its gameplay:
1) Mortgage ETH/USDC/DAI
2) Borrow BAT
3) BAT is transferred to the trumpet
4) Small mortgage BAT, borrow Ox
5) 0x is transferred to the large mortgage, and BAT is borrowed
Such a revolving loan arbitrage, the risk has also escalated. After all, BAT fluctuates greatly, and mortgage loans are prone to liquidation, and if the COMP price plummets, then the mined COMP is not enough to support the loan interest.
The more ways to play, the greater the risk. After all, if you enter a game that is purely for money, the result of lack of value support is that the bubble will burst. The question is when the bubble will burst.
Now that COMP has started such a hot situation, and the Dapp gameplay is directly upgraded to capital arbitrage, it is unknown how long the COMP price will last.
For the Compound lending platform, it has successfully gone out of the circle and gained a large number of users.
For depositors on Compound, if the COMP price cannot be maintained, some profits will be lost, but compared to other lending platforms, the profits are still considerable.
For players in the secondary market of COMP, the risk has always been great, and they can plummet if they can skyrocket.
It is worth mentioning that when this article was published, Compound stated on Twitter that community members created governance proposal 010. The content of the proposal includes adjusting the COMP output speed from 0.5 COMP per Ethereum block (the original plan is to produce about 2,880 COMP per day) to 0.44 COMP, and at the same time mortgage BAT, ZRX and REP to lend other assets The multiplier for 10% has been increased from 10% to 50%.
As of press time, the approval rate for this proposal is as high as 99.98%.
